Martin Lewis has shared the ‘evil genius’ way lenders keep people on the hook — so if you’re one of the 36.2 million Brits with a credit card, you best listen up.
In the latest edition of his newsletter, the Money Saving Expert founder focused on dealing with debt, offering tips on how to reduce interest and repay as quickly as possible.
He also claimed one common habit could spell ‘danger’ for your finances: only repaying the minimum amount on credit cards.
‘They’re designed to keep you in debt for decades, as you repay a percentage of what you owe, so payments reduce with the debt,’ Martin explained.
Using an example to illustrate the point, he continued: ‘On a £5,000 debt, making a typical minimum repayment, you’ll keep paying for 35yrs at an interest cost of £9,000.
‘Yet if you fixed your repayment at £200, approximately the amount of the min repayment in month one, you’d see that debt gone within three years, and just £1,600 interest.’
According to a Kantar study, 20% of people claim they stick to the minimum monthly payment available, and this group are more than twice as likely to ‘buy the sort of things they couldn’t normally afford’ with a credit card.
On top of that, these minimum credit card balance payers are 65% more likely to budget using buy now, pay later services compared to the average UK adult, and 42% more likely to claim they tend to spend money without thinking.
To help ‘beat the minimum repayment trap’, using this MSE calculator is a good place to start, allowing you you see the long-term benefits of paying more.
Then, either increase your fixed direct debit repayment to as much as you can afford or commit to putting as much as possible towards your credit card each month via standing order or bank transfer.
‘This can save you £1,000s in interest and gets you debt-free much faster,’ Martin highlights.
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That said, there is one exception to the rule on minimum repayments, which applies to those with multiple cards, loans or overdrafts.
In this case, MSE recommends listing all your borrowing in APR order from highest to lowest, and prioritise paying off high interest first.
The finance guru advises: ‘If possible, focus every penny of spare cash at trying to clear the debt with the highest interest rate, as it’s growing quickest, and just pay the minimums on all the others.
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‘Once the highest one is clear, shift focus to the next highest.’
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